249 - How to Use Proper Integration to Make Mergers Profitable

Merger-and-acquisition activity hit a near record $200 billion this year and is forecast to gather even more strength in 2018. But if the past is any indication, half of those deals will fail. A key to increasing the likelihood of success is proper post-close integration planning.

A lot has been written about deals failing over a clash of cultures, but the reality is that problems typically occur for reasons that are more easily measured. Poor integration is the No. 1 reason why mergers fail. A Harvard Business Review article last year noted 70 percent to 90 percent of acquisitions go down because of integration failures. “Companies that focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give it,” the article stated.

The three most important areas to address in a successful integration are people, processes and systems.

1. People

Integrating people goes well beyond identifying duplication and overlap from such departments as accounting, marketing, and human resources. Benefits packages also have to mesh or a deal can fall apart. In one planned merger among two professional service companies, the target firm gave staff benefits as much as 60 percent of salary while the acquiring company paid half as much. The deal never closed because that gap was too substantial. Smaller things, like titles and who gets an office versus a cubicle, are also incredibly important in keeping staff happy after the deal. Other people challenges include potentially unfunded pension liabilities and contracts with unions that are nearing an end. The quality of health insurance plans and how much employees at both companies contribute also need to be reconciled.

2. Process

The goal in any integration is being able to transact business on Day 1 — ship product, invoice customers, buy inventory, pay bills and pay employees. That requires project plans by a key function — treasury, finance and accounting, operations, and human resources — so there is control of cash to ensure that operations continue uninterrupted. Each department needs a 100-day plan along a timeline with bite-sized activities.

3. Systems

Systems integration starts with a willingness to learn from both sides. For things to work efficiently there will need to be common computer systems and reporting tools but also the migration of data and the integration of both firms’ histories. That will require moving to one firm’s systems or to a new platform. Customer records, vendor information, and employees’ financial and HR records are among the sensitive data to be integrated. Systems for sourcing, procurement and manufacturing processes also require integration.

Getting everything done with people, processes and systems is best achieved by appointing a project management officer to oversee the entire integration — a champion whose sole motivation is execution. That should be an individual who is not needed in any day-to-day role. Larger companies that undertake regular acquisitions typically will have that position on staff, but smaller firms may need to hire a specialist consultant at least 60 days before closing.

Once all the nuts and bolts are taken care of, marrying the culture of the two firms is vital. That’s best done by following the three Cs — connect, combine and consolidate. This takes time and is impossible to do all at once.

The connect stage is when people come together to learn from each other with focus being on relationships and sharing of knowledge. Combining is learning how to collaborate and share common goals and migrating systems; focus is on teamwork and alignment. Consolidation is when cultural assimilation occurs, processes and systems are optimized, and a unified market presence is achieved. Focus is then on strategy and innovation.

Finally, any successful merger needs an effective communications plan, explaining to investors, customers and employees the rationale for the deal. For each stakeholder, communications should answer two questions: Why we did it, and what’s in it for them. Today, effective communications plans may include a social media component.

The final act of a successful integration is reporting the success of the deal. That is helped by setting up systems and dashboards during integration that record the synergies and benefits of the merger so results can ultimately be shared regularly with management and investors.